EBP

You need to amend the plan to prospectively suspend safe harbor contributions (date must be at least 30 days out), terminate the plan as of a certain date (not earlier than the date of suspension of the safe harbor contributions), and update the plan to comply with current law. You must give a notice of suspension of the safe harbor contribution to participants at least 30 days before the suspension of safe harbor contributions is effective. The owner will be required to make safe harbor contributions based on 2024 compensation until the date of suspension of the safe harbor contributions. Example: Adopt suspension and termination amendment on 1/15/24, effective 2/15/24. Give participants notice on 1/15/24, telling them safe harbor contributions are being suspended effective 2/15/24. Make 2024 safe harbor contributions for compensation through 2/15/24. There are best practices with regard to the language in the termination amendment, but those aren't different when you're terminating a safe harbor plan vs. a non-safe harbor plan.

Austin - totally agree with you that these rules are a nightmare. The more I look at them, the more complicated they seem. I will also say that we rushed to amend some plans by year-end to avoid the LTPT rules because we determined those were discretionary changes. However, I don't think we had to for our pre-approved plans. Notice 2024-02 (which of course was issued last minute), Q & A J-1(a), says that the deadlines to amend an eligible retirement plan... for the applicable provisions of the Acts, or any regulations thereunder, which apply to both required and discretionary amendments are hereby extended to (basically) 2026. See also footnote 16, which says: "With respect to pre-approved plans, the extended plan amendment deadlines apply to both interim (required) and discretionary amendments." If you attended the same training I did, look at slide 67: "According to preamble, extended deadline includes amendment to Normal Requirements to avoid the LTPT rule. Example: Plan changes from 1 YOS to immediate eligibility." This is what we did with some clients, but now I think we could have waited.

I don't know that the option in your second paragraph is available as the law is currently written, as you point out in your first paragraph. And if plans are already using one computation period method for most employees, why is it easier to bifurcate the methods? I get that it may allow plans to exclude some employees longer, but it seems to me it's easier to keep all computation periods the same. That way, the only variable is the number of hours. On the other hand, I'm not a recordkeeper.

I'm confused by the OP. What was the employee's DOH? And when did the employee complete a year of service? Was the employee eligible to participate on 1/1/21 or would the employee have been eligible to participate on 1/1/22?

I believe that if the plan's regular age requirement is age 21, that age can be applied to LTPT employees as well. The change for LTPT employees is to the service requirement, not the age requirement. So I think Relius is doing it right. When he turns 21, in 2026, he would be able to start participating in the 401(k) deferral portion of the plan, provided he has at least 500 hours in three consecutive years from DOH in 2021 to attainment of age 21 in 2026. Example 1: 2021 - less than 500 hours 2022 - 500 hours + 2023 - 500 hours + 2024 - 500 hours + 2025 - 500 hours + 2026 - attains age 21 and enters on next entry date Example 2: 2021 - less than 500 hours 2022 - 500 hours + 2023 - less than 500 hours 2024 - less than 500 hours 2025 - 500 hours + 2026 - 500 hours + 2027 - 500 hours + 2028 - enters plan on first entry date in 2028 I believe this is right. The plan uses whatever method for counting hours it uses for regular employees, so if the first year is the employment year and the second and following years are the plan year, that's what you use. If the plan uses employment years for all years, that's what you'd use. I actually think this makes it simpler than having one method for regular employees and a different method for LTPT employees. Everything about determining eligibility is the same as for regular employees, except for number of hours. (I'm not saying implementing this is easy. There's a lot of recordkeeping and the plan document language will be necessarily complicated, but the determination of hours and computation periods shouldn't be overly difficult.)

Just an FYI - if a participant goes online to the website of the large recordkeeper for our plan, there is a loans and withdrawals section that outlines all available distribution options for a participant based on age, whether there is a rollover account, maximum loan allowed, etc. Clicking on any of these gives the participant more information about that option. I assume the other large recordkeepers have a similar format.

PamR makes a good point. I would also check to see what the deferral election forms say before coming to a conclusion as to the correction needed. Are participants allowed to make a separate election for bonuses and commissions? What else does the form say?

Not sure what you're asking.

Are you asking how to determine the amount of each missed deferral or how to correct missed deferrals? When you say this includes on the employer side, do you mean employer contributions (not deferrals)? If you're trying to determine missed deferrals, you need to start by determining the amount of deferrals that should have come out of each paycheck for each individual participant, the date the deferrals should have come out, and the date the deferrals did come out. You can't calculate on an overall basis. (I'm not sure what you mean by that.) Also, what other contingencies are you referring to? Are you the employer or a recordkeeper? Lots of unanswered questions here so it's hard to give you guidance. For how to correct, check EPCRS (Rev. Proc. 2021-30). It gives specific correction methods for the situations here.

They may be exempt, but consider whether they might want to get coverage anyway. No one ever thinks their co-owner will be dishonest, but what if they are? To me, it's a small price to pay for some reassurance.

I recently evaluated a similar situation for a client who had a terminally ill participant under age 59-1/2 who was on leave. Here is part of my answer: "As far as the 10% early withdrawal penalty because he’s not 59-1/2 yet, SECURE 2.0 does contain an exception to the penalty on early distributions for individuals with a terminal illness. A physician must certify that the employee has a terminal illness on or before the date the employee takes a distribution. Further guidance is needed on what type of evidence is sufficient for the plan administrator. The term “terminally ill individual” means an individual who has been certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 24 months or less after the date of the certification. (Code §101(g)(4)(A)) SECURE 2.0 says that 84 months is substituted for 24 months in this case. It sounds like [recordkeeper] is not yet set up for this provision of SECURE 2.0, which is not surprising. There are so many moving parts to the changes in SECURE 2.0 for recordkeepers in particular that they’re scrambling right now. And, as with this provision, we all await further guidance on many provisions. Because the 10% early withdrawal tax is assessed to the individual and does not affect the distribution amount, there is some time for [recordkeeper] to figure out how to report this. [Recordkeeper] would withhold the normal 20% now when it distributes. When the participant files his taxes, he would pay the 10% tax penalty at that time. I assume that by tax season next year, [recordkeeper] will be able to code his 1099-R with a special code indicating a physician certified his terminal illness and there will be a Schedule to attach or someplace to report it on the Form 1040, but that is unknown at this time. Here are two other exceptions to the 10% early withdrawal penalty that could work in this participant’s case: The participant is totally and permanently disabled. The employee separates from service during or after the year the employee reaches age 55." In my client's case, they looked into the requirements for life insurance and other benefits to see if they would be adversely affected by terminating the participant. They determined that his benefits would not be adversely affected, so they opted to terminate him and presumably, he used the age 55 exemption to avoid the 10% early withdrawal penalty. That was a cleaner approach than going with the SECURE 2.0 provision for them.

No, this is not industry standard. With a daily valued platform, the prior method should not be that hard to calculate. And unfortunately, a DRO is not always submitted to a plan administrator shortly after the date of divorce. We've, on occasion, gotten orders many years after the divorce to qualify. Then what? I appreciate Peter Guilia's practical remarks. We often advise clients to check with the recordkeeper before implementing certain plan provisions to minimize possible operational failures, but we don't like it. This is another area where recordkeepers force plans into their pre-determined computer programming boxes because it's easier for them. It's also in line with the IRS approach over the last 20 years to force the standardization of all plans. I miss the good old days where plan design could be tailored to the sponsor's needs by legal counsel (limited only by the law), recordkeepers could provide an individualized approach customized to the plan and the sponsor's needs, along with personal customer service, and accountants could advise on the tax aspects. I guess I'm showing my age.

Yes, if you want to be exempt from testing, the eligibility requirements need to be the same.

Easy correction under EPCRS by amending plan retroactively to permit early participation for the one affected employee: Rev. Proc. 2021-30, App. B, section 2.07 - (4) Early Inclusion of Otherwise Eligible Employee Failure (a) Plan Amendment Correction Method. The Operational Failure of including an otherwise eligible employee in the plan who either (i) has not completed the plan's minimum age or service requirements, or (ii) has completed the plan's minimum age or service requirements but became a participant in the plan on a date earlier than the applicable plan entry date, may be corrected by using the plan amendment correction method set forth in this paragraph. The plan is amended retroactively to change the eligibility or entry date provisions to provide for the inclusion of the ineligible employee to reflect the plan's actual operations. The amendment may change the eligibility or entry date provisions with respect to only those ineligible employees that were wrongly included, and only to those ineligible employees, provided (i) the amendment satisfies https://checkpoint.riag.com/static/23.05.0503.21/v2018/images/doc/link.gif § 401(a) at the time it is adopted, (ii) the amendment would have satisfied https://checkpoint.riag.com/static/23.05.0503.21/v2018/images/doc/link.gif § 401(a) had the amendment been adopted at the earlier time when it is effective, and (iii) the employees affected by the amendment are predominantly nonhighly compensated employees. For a defined benefit plan, a contribution may have to be made to the plan for a correction that is accomplished through a plan amendment if the plan is subject to the requirements of https://checkpoint.riag.com/static/23.05.0503.21/v2018/images/doc/link.gif § 436(c) at the time of the amendment, as described in https://checkpoint.riag.com/static/23.05.0503.21/v2018/images/doc/link.gif section 6.02(4)(e)(ii) Document Title:Rev. Proc. 2021-30, 2021-31 IRB 172 -- IRC Sec(s). 401; 403; 408, 07/16/2021 Checkpoint Source:Revenue Procedures (1955 - Present) (RIA) © 2023 Thomson Reuters/Tax & Accounting. All Rights Reserved.

Assuming the grown children are the beneficiaries and that this is a defined contribution plan, they would have the right as beneficiaries to elect a rollover to an IRA(s) at any time in most, if not all, plans (RTFD). Any RMDs owed would have to be taken first. After rollover to an IRA(s), the RMD issues are the responsibility of the beneficiaries.

Hire ERISA counsel to guide the process and keep them on track for the future.

Thanks so much, Brian! That's very helpful!

It's the middle of the night and I'm answering partly off the top of my head, which is always a bit dangerous. Form 5330 instructions for Schedule C, line 1, include the following: "Transactions involving the use of money...will be treated as a new prohibited transaction on the first day of each succeeding tax year or part of a tax year that is within the taxable period." Form 5330 instructions for Schedule C, line 2, include the following: "A disqualified person who engages in a prohibited transaction must file a separate Form 5330 to report the excise tax due under section 4975 for each tax year." Accordingly, I believe you should file a 2021 Form 5330 and a 2022 Form 5330 and that you cannot do a combined reporting. You don't say what the date of correction is, but I'm assuming it was 12/31/22. That means you had two PTs - one in 2021 and one in 2022.* The tax due with the Form 5330 is only the tax, not the interest and penalties due for the delinquent filing of the Form 5330. Again, from the instructions: "Any interest and penalties imposed for the delinquent filing of Form 5330 and the delinquent payment of the excise tax...will be billed separately to the disqualified person." It sounds to me like the "late letter" may have actually been the normal assessment of interest and penalties that are billed separately by the IRS after the filing and payment of the excise tax. When we do Forms 5330 for late payments, we advise our clients that they'll likely receive an additional bill from the IRS at a later date of a miniscule amount. Sometimes they do and sometimes they don't. *The 2021 Form 5330 takes into account the earnings on the 2021 late deposits from the date the deposit should have been made to 12/31/21. The 2022 Form 5330 takes into account that amount reported on the 2021 Form 5330, plus the earnings on the 2021 late deposits from 1/1/22 - 12/31/22 (assuming that's the date of correction) - two separate transactions listed in #2 on Schedule C.

Brian - Very helpful summary. Do you happen to know how Medicare coverage obtained at age 61 for ESRD affects HSA eligibility if the person qualifying for Medicare is covered under a spouse's HDHP (family coverage)? I believe the spouse could continue to make maximum HSA contributions under the spouse's plan, correct? Could the person qualifying for Medicare continue to make a $1,000 catchup contribution to his own HSA? Thanks!

Just went through an IRS audit for a client. Had to point out (more than once) that the amount of the contributions for the year matched the Form 5500, matched the trust deposit, and matched the company's deduction, etc. Two years down the road when this client gets audited, you will not be able to just give copies of the contribution check, contribution deposit, and shoe corresponding amounts on the Form 5500 and business tax return. As others have pointed out, it's not worth the time to explain this later. If everything matches up, no explanation is needed. (And I might add that the agent we had seemed to not be familiar with some basic retirement plan knowledge despite working as an IRS auditor for 15 years. I would not have wanted to explain this situation.)

Agreed.

Side note - one of our attorneys always wanted us to spell out the amount (one hundred ten dollars vs $110) in the hopes that it wouldn't jump out as much and entice a participant to file suit. In recent years, another of our attorneys uses this language instead: "In such a case, the court may require the plan administrator to provide the materials and pay you a penalty up to a certain amount per day until you receive the materials, unless..." Nonetheless, in 35 years of practicing benefits, I've never personally seen a case where this has happened. Of course, we tell all our clients that they need to provide the SPD promptly if requested.

Perhaps. But I'd bet that IRS wants to see it anyway. And is it possible that even if single-sum distributions are provided to everyone, part of someone's distribution could need to be classified as an RMD ineligible for rollover? We would opt for the more conservative approach of not taking the chance that there could be an RMD due in the final plan year and not fielding questions from the IRS as to why a required amendment was not adopted.

If terminating in 2023, you would need to amend for required provisions and any chosen optional provisions of SECURE 1.0 and CARES, if not already amended. Also, for any required provisions of SECURE 2.0 that are effective before the termination date, and any chosen optional provisions that are effective before the termination date.

I don't have any ideas for validating a deceased participant's signature other than those already suggested, but this situation is why we include language in our plan document that requires the beneficiary designation to be received by the plan administrator during the participant's lifetime to be valid.